Commodity quick fixes misguided
Another week goes by and Thailand’s farmers are nowhere nearer a better life. The inaction of the government is partly to blame, as it’s true that authorities in Thailand have been slower off the mark than some of their regional counterparts. Of course, commodities are subject to global market forces that often catch governments napping. And prices of most commodities from coal, oil and gas to metals (blame lower demand in China) and agricultural goods — rice, rubber and palm oil — have all been in a downward cycle for the past year or so.
The impact on the farm sector in Asean is clear, given that Thailand leads the world in rice and rubber exports and Indonesia in palm oil. The knock-on effect on the economy is significant since lower disposable income in the farming community curbs consumption.
Countries across the region have been looking at ways to arrest the drop in prices of the key commodities that they export, but with little success.
Indonesia, which is the most heavily dependent on commodity exports, both mineral and agricultural, reported last week that GDP in 2014 grew by 5.02%, the weakest in five years, and down from 5.58% in 2013
The government has little ammunition to deal with commodity price declines, so President Joko Widodo is focusing on major investments in infrastructure in the hope of achieving 5.5% growth this year. So much for the 7% annual growth he promised when he was campaigning for office last year.
Malaysia has had its own problems that have been well documented during the recent oil price rout. It has, however, decided to swallow the reality pill by accepting that GDP won’t meet earlier targets that were based on higher commodity price assumptions.
Prime Minister Najib Razak has announced a slew of measures to cushion the economy from the pressure of falling commodity prices, a weak currency and damage wrought by the worst floods in history. His government has also cut its 2015 growth forecast to between 4.5% and 5.5% from the range of 5-6% in the 2015 budget it presented last October.
But unlike our neighbours who have been accepting the realities on the ground and making adjustments, Thailand seems bent on keeping up high expectations, although it knows that the likelihood of achieving the target of 4% GDP growth will be a herculean task.
Thailand has less exposure to the vagaries of commodity prices than Indonesia and Malaysia, but current conditions are cause for concern. Exports and consumption, which have nearly equal weighting in the composition of Thai GDP, with exports slightly higher, are both weak. Export markets are not picking up, with Europe mired in problems and China’s consumption of raw materials slowing. The only hope is the United States, where the recovery has some traction, but the US accounts for only 10% of Thai exports.
Consumption could be even trickier to revive. In the past, Thai governments propped up incomes through subsidies, which put more money in the hands of the people who usually spend 100% of what they earn: the poor and the farming community. The current government has cut back on all kinds of subsidies, and is hoping the public will be patient while it works out better ways to improve incomes.
The farming community, especially highly vocal rubber growers, has renewed its threats to take to the streets, never mind martial law, as natural rubber prices have sunk to around 60 baht a kilogramme, from a peak of 175 baht in early 2011.
The military government, with its China-like fear of social unrest, has bowed to some demands and has tried to push prices higher. But has it done enough to appease the more hard-headed protesters, notably rice farmers who are now selling their grain at half the price they received from the previous government?
Readers will have their own views on that question, though I believe that it’s not the job of the government to support one side or the other. After all, it was the rubber growers who decided to plant more when prices were high a decade ago, and now those trees are all producing. As for rice farmers, could they not grow more cash crops when rice prices are low?
What the government could and should do is encourage local administrative offices to educate farmers about other opportunities and options. Just buying up rubber to pave roads, when asphalt and concrete are cheaper, is not the answer.
Yes, there could be some benefits from quick-fix price solutions, but the government needs to be honest about whether such methods of supporting farmers really benefit them or the country in the long run.